Washington Tax Insight November 2021
Politics and Congressional Activity
Congressional work on legislation designed to enact the agenda laid out by President Biden in his State of the Union address and his budget plan for Fiscal Year 2022 has accelerated this fall with major developments related to the Build Back Better legislation, which is progressing under the budget reconciliation process. After enacting additional pandemic-relief legislation in early 2021, Congress moved on to approve infrastructure legislation in the Senate in August with the House finally approving the bill on November 5th. Although the infrastructure legislation includes several tax provisions, the major legislation in 2021 with respect to tax issues is the budget reconciliation bill.
After hours of negotiations over several weeks, President Biden released a new framework for the Build Back Better legislation on October 28th. A summary of the legislation and legislative text for House consideration have been released, but a specific date for a House vote has not yet been set.
Congress approved a short-term Continuing Resolution that will fund the federal government until December 3rd and a separate bill that extends the debt ceiling limit through December 16th. Both issues must be dealt with before Congress adjourns for the year, and Congress is also expected to complete action on the Build Back Better bill and the infrastructure legislation by the end of the year.
Funding for Fiscal Year 2022 and the Debt Limit
FY 2022 began on October 1st, but in the absence of a package of spending bills approved by both the House and Senate, the government is operating under a Continuing Resolution that funds operations at FY 2021 levels until December 3rd. Congress approved and the President signed a short-term continuing resolution with the government funding, but the short-term extension of the debt ceiling limit through December 16th was stripped from the bill in the Senate. Democratic leadership was forced to move the debt ceiling limit extension through Congress as a separate bill, but Treasury Secretary Yellen has warned that this extension is only a temporary measure that must be addressed before the expiration date.
The Senate Appropriations Committee released 9 spending bills to cover FY 2022, but it is unclear whether these bills will be marked up in committee or go directly to the Senate Floor. This legislation will be considered under regular order on the Senate Floor, which means that it will require support from at least 10 Republicans in addition to all Democrats in order to break a likely filibuster.
The House has approved a package of seven appropriations bills.
Bipartisan Infrastructure Package
The Senate-passed infrastructure bill was finally approved by the House on November 5th. The bill has been sent to President Biden for signature with a signing ceremony expected in the near future. This legislation includes only a handful of tax provisions, including the imposition of new information reporting mandates for cryptocurrencies and the early termination of the Employee Retention Credit program after 3Q of 2021.
Prior to House passage, the House Progressive Caucus took the position that they would not vote to support the infrastructure package without a vote on the budget reconciliation bill also being scheduled on a package that will pass both the House and Senate. An agreement was reached with House progressives and House moderates that the House would vote on the infrastructure bill on November 5th, and that the budget reconciliation legislation would be scheduled for a House vote the week of November 15th, once a CBO estimate was received to verify the bill’s revenue estimates.
The Budget Reconciliation Legislation
The major legislation in 2021 with respect to tax issues is the Build Back Better legislation, which was drafted to include many of the key Biden agenda items, including provisions targeting large corporations and high-income individuals, middle-class tax relief, tax incentives and new spending on “human” infrastructure initiatives, and proposals to address climate change. The budget reconciliation legislation is being considered pursuant to the Fiscal Year 2022 budget resolution that provides reconciliation instructions to the House committees for a package of $3.5 trillion in spending and tax relief provisions, which would be partially offset by corporate and individual tax increases.
Earlier this year, the House Ways & Means Committee approved the tax title intended to be included in the House budget reconciliation bill, including several revenue raising proposals such as increases in the tax rate imposed on corporations, high-income individuals and capital gains. The Ways & Means bill also included changes to key international tax rules that were first enacted in the 2017 Tax Cuts and Jobs Act (TCJA). The Senate Finance Committee has not held a markup on the tax title of reconciliation legislation, but SFC Chair Wyden (D-OR) has released discussion drafts and draft legislative language on a number of issues that he would like to include as revenue raisers in the Senate version of the budget reconciliation legislation.
On October 28th, President Biden released a proposed Framework for the Build Better Act (“Framework”) that is “intended to guide the drafting of legislative language in Congress.” The new Framework includes $2 trillion of tax revenue raisers intended to pay for the estimated $1.75 trillion in proposed tax incentives and new social spending. The new Framework was offered in order to resolve key differences among Democrats about the size of the bill and specific provisions related to tax incentives and other spending in addition to the revenue offsets.
As explained above, an agreement within the Democratic Caucus was reached on November 5th that the House version of the budget reconciliation bill would be considered on the House Floor the week of November 15th. There have been changes made to the House version as compared to the original bill that compiled the titles from the various House committees, including the Ways & Means Committee.
It is important to note that once the new House bill based on the Framework passes the House, it will be considered in the Senate, where it will mostly likely be revised. Therefore, some of the issues included below in the list of proposals not included in the Framework could still be in play including those that are part of the Wyden discussion drafts. If the Senate does make changes to the bill, the differences in the two bills will have to be worked out as part of conference negotiations between the House and Senate.
The revised House version of the tax title includes significant business and international provisions, some of which were not included in the Ways & Means-approved version of the bill or have been modified. There are also important individual tax provisions included.
Key Tax Provisions included in the Framework – Revenue Offsets
- 15% Corporate Minimum Tax on Large Corporations
- 1% Surcharge on Corporate Stock Buybacks
- Global Minimum Tax: Consistent with the OECD agreement at a 15% rate and on a country-by-country basis
- Penalty Rate for Foreign Corporations Based in Non-Compliant Countries (BEAT)
- Delay the requirement to capitalize R&D costs until 2025 instead of 2021
- New AGI Surtax on the Top 0.2% of Individuals
- Close Medicare Tax Loophole for the Wealthy by strengthening the Net Investment Income Tax for Those Making over $400,000
- Limit Business Losses for the Wealthy by continuing the limitation on Excess Business Losses
- Limitations on qualified small business stock exclusions
- Wash sale rules on cryptocurrency
- Invest in IRS Enforcement by targeting high-income individuals, complex partnerships, and large corporations
- Changes to the tobacco tax
- Changes to the limit on state and local tax deductions
Tax Provisions Not included in the Framework – Revenue Offsets and Miscellaneous Issues
- Increase in the corporate tax rate
- Increase in the individual tax rate, except as targeting wealthy individuals
- Billionaire’s tax (Wyden mark-to-market proposal)
- Changes to capital gains rates
- Changes to the Section 199A deduction
- Changes to the treatment of carried interest
- Changes to estate and gift tax rules and the grantor trust rules
- Changes to the partnership rules (such as those proposed by SFC Chair Wyden)
- Changes intended to curb the use of mega-IRAs
- Imposition of a new carbon tax
- Retirement savings mandate
- Municipal bond provisions
- Provision that would require banks and other institutions to report annually to the IRS on the gross inflows and outflows from certain financial accounts that exceed a de mimimis
Key Tax Provisions Included in the Framework – Tax Incentives and Benefits
- Expanded Child Tax Credit for one additional year
- Clean Energy Tax Credits covering utility-scale and residential clean energy, transmission and storage, clean passenger and commercial vehicles, and clean energy manufacturing
- Investments and Incentives for Clean Energy Technology, Manufacturing, and Supply Chains
- Earned Income Tax Credit extended for one year
- Affordable Care Act premium credits extended for one additional year
Discussion of Key Business Tax Revenue Offsets
- Corporate minimum tax: In lieu of an increase in the corporate tax rate, which was included in the Ways & Means approved tax title and drew objections from Senator Sinema (D-AZ), the Framework includes a proposal for a 15% minimum tax on certain corporations with adjusted financial statement income greater than $1 billion over a defined applicable period. An applicable corporation’s minimum tax would be equal to the amount by which the tentative minimum tax exceeds the corporation’s regular tax for the year. Tentative minimum tax would be determined by applying a 15% tax rate to the adjusted financial statement income of the corporation for the taxable year after taking into account any AMT foreign tax credits and financial statement net operating loss. A similar proposal was released by Senators Warren (D-MA) and King (I-Maine).
- Surcharge on Stock Buybacks: The Framework calls for a 1% excise tax on publicly traded US corporations on the value of its stock that is repurchased by the corporation during the taxable year. The amount of repurchases subject to the tax would be reduced by the value of any new issuance to the public and to employees of the corporation, and exclusions from the excise tax would apply to certain specified repurchases. This surcharge would be effective for stock repurchases after December 31, 2021.
- Tax treatment of multinationals: The Framework calls for an effective tax rate of 15% on global intangible low-taxed income (GILTI)—up from the current effective tax rate of 10.5%—which would be imposed on a country-by-country basis. This proposal would be consistent with the recently announced OECD agreement on a global minimum tax. The Framework would also preserve the Base Erosion and Anti-Abuse Tax (BEAT) rather than replacing the BEAT with a new proposal called Stopping Harmful Inversions and Ending Low-Taxed Developments (SHIELD), which was included in the Administration’s budget proposal. The Framework would increase the BEAT rate to 18%, rather than 15% as included in the Ways & Means-approved bill, and the increases would begin to take effect in 2023 and reach 18% in 2025. The Framework also includes several international proposals that are included in the Ways & Means Committee-approved tax title. The Framework would delay the effective dates of several of the international changes, including the changes to the GILTI rules.
- Increased IRS Enforcement: The Framework includes a general call for increased IRS enforcement in an effort to close the “tax gap” as well as compliance provisions intended to tighten the rules related to backup withholding and third-party network transactions. This proposal is estimated to raise $400 billion.
Treasury and the IRS
Treasury and IRS Updates
Senate appropriators released a proposal for Fiscal Year 2022 that calls for allocating $13.6 billion to the IRS, which is an increase of $1.7 billion over FY 2021. This includes $417 million which the Biden Administration requested in its FY 2022 budget blueprint as part of the effort to improve compliance and enforcement activities to narrow the “tap gap.” This is identical to the amount included by House appropriators in their spending package.
Other Issues and Guidance
Research Credit – New Information Requirements: The IRS released a Chief Counsel Memorandum that outlines the new information reporting requirements for claiming the research credit under Section 41, which are effective after January 10, 2022. The Memorandum states that the guidance will help the IRS “determine upfront if an R&E credit claim for refund should be paid immediately or whether further review is needed.” The guidance states that from that date, “there will be a one-year transition period during which taxpayers will have 30 days to perfect a research credit claim for refund prior to the IRS’ final determination on the claim.” The Memorandum states that taxpayers must provide the following information when making a refund claim:
- Identify all the business components to which the Section 41 research credit claim relates for that year;
- For each business component, identify all research activities performed and name the individuals who performed each research activity, as well as the information each individual sought to discover; and
- Provide the total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses for the claim year using Form 6765, Credit for Increasing Research Activities.
There has been criticism of the new policy from tax practitioners who say that the amount of information required upfront (as opposed to during an audit) will be burdensome for taxpayers.
Foreign Currency Rules: The IRS issued Notice 2021-59, which announces a one-year delay in applying its final foreign currency regulations under Section 987. The rules instruct multinational corporations on the tax treatment of currency gains and losses. The deferred regulations will apply to tax years beginning after December 7, 2022. For calendar year taxpayers, the 2016 final regulations and the related 2019 final regulations will apply to the tax year beginning on January 1, 2023. The IRS does not intend to amend the applicability date of Treasury Regulation §1.987-12.
IRS Guidance through Frequently Asked Questions (FAQs): The IRS published a news release updating its process for certain FAQs on newly-enacted tax legislation. The IRS stated that it is updating the process to address concerns about transparency and the potential impact on taxpayers when FAQs are updated or revised. Significant FAQs on newly-enacted tax legislation, as well as any later updates or revisions to the FAQs, will be announced in a news release and posted on IRS.gov in a separate fact sheet. The IRS also addressed issues regarding the potential application of penalties to taxpayers who rely on FAQs by providing clarity about whether there is penalty protection from relying on FAQs.
Assumption of Partner Liabilities: The IRS published a notice and request for comments concerning assumption of partner liabilities. Written comments are due on or before December 13, 2021. The rules relate to a partnership’s assumption of certain fixed and contingent obligations in connection with the issuance of a partnership interest, as well as to Section 358(h) for assumption of liabilities by corporations from partners and partnerships and temporary regulations concerning the assumption of certain liabilities under Section 358(h).
Combined Information Reporting by a Successor Business Entity: The IRS published a notice and request for comments on Revenue Procedure 99-50, which permits combined information reporting by a successor business entity (i.e., a corporation, partnership or sole proprietorship) in certain situations following a merger or a acquisition. Written comments are due on or before December 13, 2021.
IRS Extensions to Audit Foreign Income – Subpart F: The IRS released a Chief Counsel Memorandum (202142009) that states that when the IRS gets additional time to audit taxpayers after omitted foreign income is discovered under Subpart F, the extension applies to their entire returns, not just to the omitted items. The IRS generally has three years after a tax return is filed to audit it, but that period is extended to six years if omitted Subpart F income is found. The extended statute of limitations gives the IRS additional time to determine deficiencies on unrelated issues as well. The memorandum also stated, however, that an agreement between the IRS and the taxpayer to extend the exam period to six years from three does not give the taxpayer the right to claim a credit or refund after the original period has expired.
Status of Pension Plans if Employees are Rehired: The IRS published an announcement stating that employers generally will not jeopardize the tax status of their pension plans if they rehire retirees or permit distributions of retirement benefits to current employees who have reach age 59 ½ or the plan’s normal retirement age. The IRS posted FAQs to assist employers impacted by COVID-19.
LLC Eligibility for Tax-Exempt Status: The IRS issued Notice 2021-56, which sets forth standards that a limited liability company (LLC) must satisfy to receive a determination letter that they are recognized as tax-exempt under Section 501(a) and described in 501(c)(3). An LLC must require that all its members be tax-exempt organizations, governmental units or extensions of such a unit to be recognized as tax-exempt, and this requirement must be written into the articles of organization and operating agreement. The Notice also requests comments by February 6, 2022, from the public on specific issues relating to tax-exempt status for LLCs. The Notice does not affect the status of organizations already recognized as tax-exempt under Section 501(c)(3), and it is not intended to alter the substantive criteria the IRS will use to evaluate a new application for an LLC’s tax exemption.
Draft Instructions for Foreign Tax Credit: The IRS released draft instructions for Form 1116, Foreign Tax Credit (Individual, Estate or Trust) to reflect new schedules.
Draft Instructions for the Empowerment Zone Employment Credit: The IRS released draft instructions for Form 8844, Empowerment Zone Employment Credit, to reflect the credit’s extension and interaction with other employment credits. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 permitted the empowerment zone designations to be extended through 2025.
Chile/information exchange: The IRS released a revenue procedure that added Chile to the list of jurisdictions with which the US has a relevant information exchange agreement in effect for reporting payments of deposit interest. The IRS has added two countries, the Dominican Republic and Singapore, to the list of countries with which it would like this type of arrangement.
Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for US Tax Withholding and Reporting (Individuals): The IRS published instructions for Form W-8BEN concerning several issues including Section 1446(f) and tax treaty benefits claims.
IRS Practice Unit/Section 263A: The IRS released a practice unit that provides tax law and audit steps for reviewing a reseller’s uniform capitalization cost computations under Section 263A. It focuses on the simplified production method and does not cover the final Section 263A regulations that were effective November 20, 2018.
Federal Tax Return Preparers- PTINs: The IRS published an announcement reminding federal tax return preparers that they must renew their Preparer Tax Identification Numbers (PTINs) before December 31, 2021.
LB&I Meetings: The IRS announced that beginning October 18, 2021, the Large Business and International (LB&I) Division will accept all taxpayer requests to meet with IRS employees using secure video conferencing.
IRS Nationwide Tax Forums: The IRS published a new release announcing 18 self-study seminars available online through the IRS Nationwide Tax Forums, covering issues such as the gig economy and virtual currency.
Guidance or action that could be forthcoming:
Employment Tax information Reporting: A representative of the IRS Office of Chief Counsel has stated that the IRS will be providing detailed guidance on how to provide information to the government on resolving employment tax issues in the very near future.
OECD – Adoption of a Global Minimum Tax & Digital Taxation
The OECD announced that 136 countries (out of 140) have signed on to an agreement that would revise international tax rules in significant ways including requiring participating jurisdictions to impose a minimum 15% tax rate on the income of multinational corporations. The goal is to impose the new tax regime starting in 2023. On October 13th, the G20 Finance Ministers endorsed an implementation plan for revising global international rules, and the new global tax deal was approved by G20 leaders at their Rome meeting at the end of October.
The two pillar solution, which has been worked on within the membership of the OECD/G20 group known as the Inclusive Framework, is designed to address the tax challenges of the digitalization of the global economy. Pillar One, which would reallocate profits of the largest and most profitable multinational companies to more jurisdictions, is expected to require a multilateral convention and tax treaty changes. Pillar Two would apply a global minimum tax of 15% to large multinationals on a country-by-country basis.
We will provide additional detail on the OECD agreement in a future True Insight.
The European Commission announced that it will publish legislation on December 22nd to translate the recently agreed 15% global minimum tax (per the OECD agreement, Pillar Two) into European law and to prevent tax avoidance through the abuse of shell companies. The EC also intends to publish its proposal for how to fund its long-term budget, which is expected to include a proposal for a digital tax. A bill for Pillar One of the OECD deal, which involves the reallocation of taxing rights, will be presented in 2022.
A European Union public tax reporting law rule for companies passed its last major step after 21 of the 27 EU countries agreed to ratify a public country-by-country reporting rule that had been agreed to provisionally in June by the European Parliament, which must now adopt the final rule. Under the rule, companies with global revenue above 750 million euros will have to disclose details of earnings, profits or losses, taxes paid and numbers of employees in each EU country and in jurisdictions on an EU tax haven list. The rule is likely to be effective in 2024 or 2025.
The European Commission released a consultation document that would standardize systems throughout the EU for claiming withholding tax relief on cross-border securities investments. Comments were due by October 26th and they will be used to draft a legislative proposal for 2022.